Housing sector

Does institutional ownership of SFRs help or hurt the housing sector?

The US single-family rental (SFR) market is on the rise. Residential rental rates in the United States rose 12.6% in January 2022, the fastest year-over-year increase in more than 17 years, according to the CoreLogic Single Family Rent Index (SFRI). At the same time, SFR should outperform other real estate sectors for the foreseeable future, fueled in particular by a growing number of institutional investors who are investing heavily in the sector. According RealtyTracinvestment in single-family homes in Q2 2021 accounted for 15.4% of total US single-family home purchases, beating the historical range of 10-15%.

What else is behind SFR’s request?

SFR’s growth was driven by increased rental demand for maintenance-free, worry-free housing products. In addition, other drivers have converged and will continue to converge to further drive consumer demand for single-family rental housing, including:

  • The lack of stock of affordable starter homes (1,400 square feet or less), which steadily declined through the 2010s, helped cultivate demand for SFR housing. In 2020, there were 65,000 entry-level homes completed, but 2.38 million first-time buyers, highlighting the growing availability gap, according to Freddie Mac.
  • As interest rates have risen in recent months, more individuals and families are choosing to rent rather than buy. This trend will accelerate as the Fed continues to raise short-term rates to keep inflation under control. The possibility of renting from a large investor who offers a cohesive and well-maintained turnkey product is a compelling option for many.
  • Particularly in states with higher costs, the recent move to limit mortgage interest and property tax deductibility has dampened demand for high-end homes and made renting more attractive. While this has had limited effect in the low-cost debt environment of recent times, it will potentially become more impactful if mortgage rates continue to rise, and particularly if the feds further erode the “subsidy” tax on buying a house.

The explosion of the SFR sector and built-to-rent

SFR’s growth, combined with a very limited supply of housing, has given rise to SFR’s sister, the “built-to-rent” (BTR), which helps to fill the gap in supply of single-family homes for investors. institutional. These homes are specifically designed to be managed by the home developer or builder, sold to a third party, or placed in a joint venture, often with a private equity firm or other institutional owner. The National Rental House Council (NRHC) said BTRs accounted for 26% of properties added to the portfolios of single-family rental housing providers in the fourth quarter of 2021, compared to 3% in the third quarter of 2019.

This is a classic case of supply and demand; the country’s housing inventory cannot keep pace with the demand for single-family homes owned and rented. And there’s a growing preference for renting over owning among Gen Z, Millennials and baby boomers, in particular, according to The Urban Institute.

What the critics say

The SFR boom received critical coverage, primarily around the impact of the growth of institutional ownership and on house prices. Specifically, the concerns are that there is artificial house price inflation in the markets if SFR investors acquire houses at above-market prices; there will be fewer homes available for individual buyers; there will be less affordable housing for many consumers, and real estate wealth is transferred from consumers to businesses whose portfolios contain billions of dollars worth of SFR properties.

Although the data supporting these claims is mixed and, in some cases, conflicting, these points certainly merit further analysis. For example, a February 2022 report by the National Housing Conference cited statistics from a report by the Federal Reserve Bank, which showed an increase of about 9% in the growth of real house prices and a reduction of 28 % of homeownership between 2007 and 2014 accelerated by institutional investors’ acquisition of real estate (REO) properties. Still, this stat can mostly indicate increases resulting from improvements to these homes. A more recent RealtyTrac The report found, overall, that investors are paying less for homes than consumers, countering a point that institutions are overpaying for homes, thereby driving up home prices in order to gain market share.

Benefits of Institutional Ownership

More inventory thanks to BTR

Institutional investors are building single-family homes and converting them to rentals. This creates a more available housing inventory, often in planned communities and usually in desirable locations. Many of these communities meet consumer demand for rental flexibility with a maintenance-free lifestyle and recreational and social common areas.

Positive community impact

SFR companies typically invest thousands of dollars in renovations and maintenance. This was evident at the start of the SFR trend in 2008 after the financial crisis, when institutional investors acquired many REOs or seized homes in poor condition, with capital requirements too expensive for many consumers. Renovated and well maintained homes have a positive and stabilizing impact on communities.

Responsibility of stakeholders

Institutional owners respond to investors, to boards, to regulators, to the media, and now to Congress. Senator Sherrod Brown (Chairman of the US Senate Committee on Banking, Housing, and Urban Affairs) held a committee hearing in February of this year titled “How Institutional Landlords Are Changing the Housing Market.” He suggested that business owners are primarily focused on profits, but the higher profile of institutional investors actually means more scrutiny of their practices and operations. This empowerment will result in better maintained properties and higher levels of customer service compared to family landlords due to the greater resources available to institutional players to respond quickly and effectively to tenant needs. In the long run, this means providing a better product for tenants.

ESG and doing good

Environment, Social and Governance (ESG) refers to companies’ emphasis on investing in “doing good”, and SFR is ripe for institutional investors to deliver positive social impact. For example, the emerging concept of “Affordable Housing Fund» focuses investments on affordable and low-income housing with the goal of reducing homelessness. An increase in this type of investment activity by large institutional players may translate into lower profits in the short term, but would contradict criticisms of SFR’s impact on real estate markets.

Josh Herrenkohl is Senior Managing Director of the Real Estate Solutions Group and leads the real estate business transformation practice at global consulting firm FTI Consulting. He can be reached at [email protected]om.